A Roth IRA continues to be a popular investment choice for building a secure retirement.  As with most investments, the more money you put in, the more money you’ll get out.  Unfortunately, there are limits to how much you can put into your account.  There are also limits on how much money you can make and still put money into your account.  Here’s a quick review of what those limitations are.

Roth IRA Contribution Limits

As of 2010, individuals can contribute as much as $5000 per year. The contributions into a Roth IRA are made with after-tax money.  If you are over the age of 50, you can make catch-up contributions; you can contribute as much as $6000 per year to your Roth IRA account.

Roth IRA Income Limits

There are limitations to how much money you can make and still contribute to a Roth IRA.  As of 2010, if you are an individual, you can make as much as $105,000 and still make the full $5000 or $6000 contribution, depending on your age. If you make between $106,000 and $120,000, you can make a partial contribution to the Roth IRA. If you make more than $120,000, you cannot contribute to your Roth IRA account.

There are also phase-out limits that allow you to make a partial contribution if your income is within a certain range.

If you are a married couple and you file your taxes jointly, you can make more money and still qualify for Roth IRA contribution. You can make as much as $167,000 and still make a full contribution to your Roth IRA. If you make between $167,000 and $177,000, you will be eligible to make a partial contribution. If you make more than $177,000, you can forget about making a contribution to your Roth IRA; you don’t qualify.  If that is the case, you may want to consider investing in a traditional IRA because there are no income limits associated with it.

Here’s how it looks:

Age Limits

With the Roth IRA, there are no age limits to be concerned with; you can contribute to the account regardless of your age.  However, except under certain “qualified” circumstances, you have to be 59 1/2 in order to start taking withdrawals out of the account and avoid withdrawal penalties.

The Roth IRA is famous for its ability to earn compound interest tax-free.  Less well known is the fact that an investor doesn’t have to have his IRA administered by a financial institution; they can administer their account themselves by selecting the “self-directed” option when the account is set up.

You Control the Account Money

With a self-directed IRA, one simply sets up an LLC which holds the account funds.  One-hundred percent of the capital gains from investments and the profits from business transactions stay in the LLC account, with no taxes due on the profits.

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Investors are often confused about what they can and can’t do with their Roth IRA.  The Roth is so flexible compared to other retirement vehicles that much is written – sometimes incorrectly – about how the IRA funds can be withdrawn.  Here’s a quick look at which distributions are qualified, and which are not.  For further clarification, see you Roth IRA professional.

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Probate is the mechanism whereby estates are settled.   When you die, the value of everything you own and everything you owe is added up, the debts subtracted from the assets, and the balance distributed to your heirs.  If there is insufficient money to pay all the debts and taxes, your property is sold, generally at auction, to raise cash so that the final bills can be paid.  The process is controlled by an estate executor, appointed by you in your will, or by the probate court if you don’t have a will.

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Mark Twain said it best: “buy land, they’re not making it anymore.”  Indeed.  It’s estimated that around 80% of the wealth in the US today is in the value of real estate.  Real estate has always offered an excellent opportunity for long term growth.  Even today, with the real estate market in a slump, there are significant opportunities to be found, and using your Roth IRA to fund your investments can bring a better-than-average rate of return if handled properly.

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Death & Taxes

The Estate Tax debate rages on in the United States.  Temporarily on hold for 2010, the tax will come roaring back in 2011.  As Presidential administrations change and Congress turns over, no one knows what the future of estate taxes will be.  One thing is for sure:  the government needs money and will take it wherever they can get it.

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The ability of a Roth IRA to quickly accumulate earnings for your retirement is legendary.  But sometimes, life throws you a curveball and you find yourself short on cash.  Fortunately, Roth IRA rules allow you to use your retirement funds for other things.  Here are five situations where you may be able to tap into your Roth IRA funds:

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For those who have lost their jobs in today’s distressing economy, there is good news: your Roth IRA funds can be used to help you re-train for a new career, or to boost your employability in your present field.  Although many industries are not hiring, there are some fields (like Computer and Medical) that are actively recruiting.  Re-training is the logical choice for many people who have lost their jobs.

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A consistent character trait of entrepreneurs is that they are risk-takers.  They like to control how their time and money are spent.  Many entrepreneurs who own a Roth IRA prefer to administer their account themselves by choosing the “self-directed” designation.

You Control the Account Money

With a self-directed IRA, one sets up a Limited Liability Corporation which holds the IRA account funds.  Essentially, the IRA owns the LLC, and the entrepreneur becomes the directing member of the LLC.  The directing member is free to invest the IRA funds however they please.  All of the profits from business transactions stay in the LLC account, earning compound interest.  Having all of the profit generated by the LLC available for re-investment gives a business owner leverage that was not previously available.

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Andrew Carnegie understood it; so did J.P. Morgan, and Cornelius Vanderbilt. These nineteenth-century American industrialists understood that money earning compound interest, left alone, could build a fortune very quickly.  The power of untaxed compound interest building on itself is now within the reach of every American through a Roth IRA.

Savings which earns compound interest grows quickly because the interest earned is added back to the principle.   Future interest is earned on the sum of (the compound of) both the principal and earned interest.  When even small sums in a Roth IRA earn compound interest for a long time, it can add up to a small fortune.  It pays to start saving early, and save regularly; but power of a Roth IRA works well whether you contribute regularly or not.

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